The big news this week was the announcement by the
International Monetary Fund (IMF) that the Chinese renminbi will
be included in its Special Drawing Rights (SDR) basket.
But is this decision purely symbolic or does it have broader
implications for the FX industry, China and the global financial markets?
It’s no secret that the Chinese authorities had targeted
getting the RMB included in the SDR basket, viewing it as an important landmark
in the development of the currency.
“It will be a ceremonial milestone for us, meaning that our
reforms are on the right track,” says one Chinese official in Shanghai.
However, the official adds that the economic impact of the RMB’s
inclusion in the SDR basket is viewed as negligible.
“I think that when the RMB joins the SDR that it will be a
symbolic move, given that the SDR only covers less than $300 billion in terms
of size and that many financial institutions have never used SDR in their
operations,” the official says.
Similarly, Bernard Lock, managing director at Global Macro
Concepts, told attendees at Profit &
Loss’ recent Forex Network Singapore conference that the RMB’s inclusion in
the SDR basket will have “zero short-term impact” in a move which he described
as “purely symbolic”.
Speaking on the same panel, Mitul Kotecha, head of Asia FX
and rates strategy at Barclays, commented: “If you look at the implications of
this, it’s not a huge amount of flow that’s likely to come to China as a result
of the SDR entry. It’s not seen as a revolutionary step, it’s a symbolic move.”
He added: “But for China it does represent a big step from
their point of view in terms of making the RMB a reserve currency. The other
factor that we need to look at, which is the elephant in the room here, is that
you need to have the capital account convertibility progressing significantly
as well to really enable the RMB to become a reserve currency.”
“A reserve currency has to be liquid, it has to be easy to
get in and out of, and while the IMF and even the US has backed the RMB for
entry into the SDR, I think that the reality is that unless we get towards
fuller capital account convertibility then the RMB inclusion in global reserves
is not going to be substantial.”
“That being said, we can’t ignore the fact that the RMB will
be sitting alongside the yen, the dollar, the euro and the pound, and that in
itself is pretty profound and shows you how far the currency has come in a
relatively short amount of time.”
Indirectly though, the determination by the Chinese
authorities to get the RMB included in the SDR basket has already had a
significant impact on the FX market.
The Chinese official confirms what was widely assumed by the
market, namely that the PBoC’s decision to devalue the yuan in August was taken
in order to help facilitate inclusion into the SDR basket.
“They were not trying to devalue the exchange rate, this was
a technical adjustment to support the inclusion of the renminbi into the SDR
basket,” the official says.
The PBoC’s decision caused a large spike in FX market
volatility, but Shawn Baldwin, founder and CEO of AIA Group, argues that it may
have had an even more significant impact elsewhere.
“I would argue that the PBoC’s decision to devalue the yuan
directly derailed the plans of the US Federal Reserve to raise interest rates
in September,” he said at Profit &
Loss’ Forex Network Shanghai conference last month. “This shows the
international power of China’s currency.”
He added that the inclusion of the RMB in the SDR basket
marks the first step in China seeking to redress the imbalance of economic
power held by the US as the world’s major reserve currency.
“The US obviously acts in its own interests and then
emerging markets and everyone else basically has to dance to the tune that’s
being set by them as the reserve currency. In light of it being the Pacific
Century coming up, it’s clear that China does not want to be relegated to an
insignificant role in the global markets, given the size of its own economy. SDR
status will help it in its global ambitions,” he said.
Speaking at the Singapore event, Bob Savage, CEO of CCTrack
Solutions, argued that although the inclusion of the RMB into the SDR basket is
symbolic, it also has deeper implications for the development of the Chinese
“The history of China’s aspirations for trading the SDR stem back to the reaction of the Fed and other central banks to the crisis in 2008 and the over-dependence of the world on the USD as a reserve currency.
“They recognised that the self-issuance of FX reserves is not sufficient to really protect Asia in the new world. They realised that three or four trillion dollars is almost too much to hold in US bonds and when those bonds started yielding nothing and there was no other places to put their money, that was the beginning of the push for the SDR inclusion,” he said.
Savage said that the other important factor to consider is
that China is trying to switch from an export-led manufacturing economy to a
import-driven service economy and that being included in the SDR has in many
ways become symbolic of China’s ability to move its economy into the next stage
“This has broad implications for the way that the world
trades currencies, it means that we’re going into a world where there are
multiple real reserve currencies, something that we haven’t seen for 20 or 30
years,” he added.
Savage also said that the SDR inclusion could help China’s
“This move is not just symbolic, it’s a call to arms for
issuing debt in RMB and in CNH. China has a dilemma where they have too much
debt wrapped in a very Byzantine mix between municipals, shadow banking and the
government. Getting foreign firms to buy Chinese debt will be very helpful, and
more than a symbol, this could be an economic pathway towards helping China
resolve its debt problem,” he said.
Taken by itself, the inclusion of the RMB into the SDR
basket could be viewed as largely symbolic, but what it is symbolic of is
Ultimately, the SDR inclusion marks the continuing maturity
of the RMB, it highlights the determination of the Chinese authorities for
their currency to have a major role in the global financial markets and means
that China is one step closer to internationalising the RMB.